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FEDERAL RESERVE BANK OF RICHMOND FIRST QUARTER 2021
AFTER THE
PANDEMIC,
WHAT’S NEXT
FOR CITIES?
The Fed’s New Financial Matthew Jackson on
Framework Repression Human Networks
VOLUME 26 ■ NUMBER 1
FIRST QUARTER 2021
FEATURES
Econ Focus is the economics
magazine of the Federal Reserve
Bank of Richmond. It covers
4 HAS THE PANDEMIC CHANGED CITIES FOREVER?
economic issues affecting the
Fifth Federal Reserve District
and the nation and is published
by the Bank’s Research Department. COVID-19 transformed how we work and socialize, which could put the future
The Fifth District consists of the
District of Columbia, Maryland,
of cities on a new path
12 TURNING STORMWATER GREEN
North Carolina, South Carolina,
Virginia, and most of West Virginia.
DI R EC TO R O F R E S E ARC H Green infrastructure can help reduce polluting runoff during severe storms,
Kartik Athreya but questions about costs give some localities pause
DI R EC TO R O F P U B L ICATI ONS
DEPARTMENTS
Jessie Romero
ED ITO R
David A. Price
MA N AG IN G E D ITO R
Lisa Kenney 1 PRESIDENT’S MESSAGE
STA F F WR ITE R S On Remote Work, Markets Will Decide
John Mullin
Hailey Phelps 2 UPFRONT
Tim Sablik
Regional News at a Glance
ED ITO R IA L A SSO C IATE
Katrina Mullen
3 AT THE RICHMOND FED
CON TR IB U TO R S
Nick Garvey
Investment Connection
Laura Dawson Ullrich
DE S IG N
8 FEDERAL RESERVE
Janin/Cliff Design, Inc. The Fed’s New Framework
PU B L IS H E D BY 16 INTERVIEW
the Federal Reserve Bank
of Richmond Matthew Jackson
P.O. Box 27622
Richmond, VA 23261 21 RESEARCH SPOTLIGHT
www.richmondfed.org
www.twitter.com/RichFedResearch
Does Health Insurance Improve Health Outcomes?
Subscriptions and additional copies: 22 ECONOMIC HISTORY
Available free of charge through our website at
www.richmondfed.org/publications or by calling
A Look Back at Financial Repression
26 DISTRICT DIGEST
Research Publications at (800) 322-0565.
Reprints: Text may be reprinted
with the disclaimer in italics below. Permission Male Labor Force Participation: Patterns and Trends
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31 BOOK REVIEW
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The views expressed in Econ Focus are those of
the contributors and not necessarily those of the 32 OPINION
Federal Reserve Bank of Richmond or the Federal Financial Distress Falls Unevenly
Reserve System.
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Cover Images: Andrea Izzotti/Shutterstock and Brian Evans/Getty Images
PRESIDENT’S MESSAGE
On Remote Work, Markets Will Decide
O
ur cover story in this issue looks the company in the marketplace versus
at the economics of cities and competitors who do less and poten-
what the pandemic means for tially spend less?
their future. How much reshuffling of Talent will have its say. Will these
businesses and residents will we see investments in workplace intangi-
among cities, suburbs, and rural areas? bles help attract and retain neces-
The answer will have important impli- sary talent, or will the talent needed
cations for local economies. to win prefer a different, more remote
Preferences will surely be quite model? And that remote model could
varied. Some customers will value a well extend far beyond the company’s
return to in-person relationship build- geographic base, potentially creating
ing; others won’t, having developed new talent hubs distant from corpo-
an appreciation of the efficiency of rate hubs.
remote interactions. Some employ- Employers will have their say.
ers will want to bring their people Workers, too, are ultimately in compe-
back into the office, to invest in work- tition with one another. Those who
place intangibles like cultures, mento- prefer working from home will need
ring relationships, and collaboration. to test themselves on whether a
Others won’t, perhaps believing they long-term remote model enhances
can operate comparably through tech- redefine the basis of competition. or diminishes their appeal in the job
nology, or putting more weight on Some will win and some won’t. The market. Will they have enough access
potential rental cost savings. Some answer may well differ by industry and to mentors within their company?
workers will want to return to the customer segment. But, to date, most of Will they be able to build broad
office and to business travel, valuing these models have been tested only in enough relationship networks outside
the resulting relationships and expe- an artificially constrained environment their company? Will they be able to
riences. Others won’t, placing more — one where all players were forced connect to others doing “leading edge”
value on the lack of a commute and/ into being remote. Until the markets work who can improve their capabili-
or the flexibility of a somewhat less have their say when the environment ties? Will their careers develop at the
structured workday at home. And of becomes unconstrained, it’s fair to say same pace? And are they now more
course, there will be many gradations we won’t know how the geographic available to attractive out-of-geography
in these preferences. reshuffling will play out. employers or more vulnerable to lower-
This range of preferences makes Customers will have their say. cost out-of-geography workers?
forecasting difficult. Many are predict- Companies will need to determine what For the past year, remote models
ing the emergence of a new way of in-person activities their customers haven’t faced in-person competition
operating that combines remote and now value: Sales calls? Conferences? in many industries. As a result, those
on-site activity, and indeed, most Relationship-building dinners? If your predicting the future of work have
employers are exploring some version competitors are investing in these been missing a key input: the voice of
of this hybrid model. (I offered some and winning, how will you react? If the market. As businesses and talent
thoughts about making this work in you are losing to a lower-cost remote explore new models, that voice will
“The Future ‘Hybrid’ Office” on our competitor, how will you react? matter a lot, for them and for their
website.) I think it would be more Competitors will have their say. communities.
accurate, however, to call this a Companies will need to test their Thanks, and enjoy the issue. EF
“holding-pattern hybrid”: a placeholder assumptions about the importance of
for companies as they test what works and process for building workplace
in the marketplace. intangibles. How much or little needs
That’s because the geographic work to happen in person to develop culture,
options available in the post-pandemic build relationships, foster innovation,
world have to meet the market test. and integrate new hires? How much
New models have the potential to do these intangibles help differentiate
Share this article: http://bit.ly/q1-presidents-message
econ focus • first quarter • 2021 1
UPFRONT
b y k at r i n a m u l l e n
Regional News at a Glance
MARYLAND In February, Gov. Larry Hogan NORTH CAROLINA Raleigh-Durham
and the Office of Rural Broadband launched International Airport (RDU) recently
SpeedSurvey, a website for residents to test announced a one-year partnership
internet speed or report service issues such with Smartvel, a Spanish business-
as an inability to access internet from local providers. While Maryland to-business software company that supports the travel industry. The
ranks third in the nation for broadband access, some residents, partnership, which began in early March, will provide travelers with an
particularly in low-income and rural areas, still face slow internet interactive map on the airport’s website that shows COVID-19-related
speeds, no internet, or access to only one provider. (See “Closing the information on testing, quarantining, and socializing for all 50 U.S. states
Digital Divide,” Econ Focus, Second/Third Quarter 2020.) The website and select international
will also allow the state to collect data and generate federal funding for destinations. RDU will
future projects. become the first airport
to include Smartvel’s
information on its
SOUTH CAROLINA BMW Manufacturing website in an effort to
will expand its campus with the addition of a increase travel through
67,000-square-foot training center, which broke the area and deliver up-
ground in February. Located in Greer, the center will to-date resources.
focus on workforce recruiting and training and will
include classrooms, an outdoor amphitheater, and an outdoor meeting
space. This $20 million investment is part of BMW’s $200 million plan to VIRGINIA In June, the Virginia Department
attract and retain workers as the automotive industry continues to evolve. of Education, in collaboration with
The center is expected to be completed in summer 2022 and will provide researchers from the University of Virginia,
numerous training opportunities, including within the BMW apprenticeship will embark on a three-year project called
program, BMW Scholars. “Equity in Virginia’s Public Education System: A Longitudinal Examination
Spanning the COVID-19 Shutdown.” The project, which received nearly
$1 million from the U.S. Department of Education’s Institute of Education
Sciences, will focus on equitable access and will measure how the
pandemic has affected students and teachers, including pre- and post-
pandemic trends related to attendance, retention, and mobility through
the 2022-2023 school year. When the project concludes in May 2024,
researchers hope to identify future policies that could help schools
i m ages co u rt esy : b mw m a n u fac tu r i n g co . a n d t h e ra l ei gh - d u r h a m a i r p o rt au t h o r i t y
recover from COVID-19 disruptions at state and local levels.
WASHINGTON, D.C. To increase minority
WEST VIRGINIA In early March, Sens. Shelley representation in leadership and executive roles in
Moore Capito, R-W.Va., and Joe Manchin, D-W.Va., the hospitality industry, the J. Willard and Alice S.
announced that the U.S. Economic Development Marriott Foundation donated $20 million to Howard
Administration had awarded the Natural Capital University in February to establish the Marriott-
Investment Fund (NCIFund) a $1.5 million CARES Sorenson Center for Hospitality Leadership. The
Act Recovery Assistance Grant. The federal grant will allow the Charles center will provide students with career development
Town-based NCIFund to establish an Emergency Response Loan Fund to and mentorship opportunities through the $1 million Arne M. Sorenson
support businesses affected by the COVID-19 pandemic. The NCIFund Hospitality Fund, newly created by Marriott International. Separately,
will also use the grant for existing programs and additional services for the foundation funded $500,000 in scholarships awarded to hospitality
businesses. students nationwide by the American Hotel and Lodging Foundation.
2 econ focus • first quarter • 2021
AT THE RICHMOND FED
by hailey phelps
Investment Connection
W
ith its Investment Connection program, the them,” says Peter Dolkart, the Richmond Fed’s community
Richmond Fed matches nonprofits and other development regional manager for Maryland and metropol-
community and economic development organiza- itan Washington, D.C. “What that does is remove some of
tions with banks and other financial institutions, similar in the guesswork for the banking institutions so that they are
concept to the television show “Shark Tank.” Investment better equipped to evaluate a project’s potential for CRA
Connection brings organizations and bankers together by credit.”
hosting in-person and virtual events where community-based After the SRC and Investment Connection teams review
organizations pitch eligible project ideas to financial insti- the proposals, the organizations are invited to present their
tutions and other funders seeking to invest in the region. proposals to funders during in-person and virtual events
Investment Connection also provides an online portal where and through the online portal. “The pitch sessions were
funders can look at proposals, filtering them by geogra- originally intended to be done in person, ‘Shark Tank’
phy, type of project, or type of style,” says Dolkart. “We did our
investment. first sessions like that in November
Within the Federal Reserve 2019, and we were planning to go
System, the regional Reserve forward and continue that way in
Banks work with both community 2020, but the pandemic changed
development groups and finan- them to virtual sessions.”
cial institutions, so they are posi- In one of the first rounds
tioned to bring banks together with of Maryland pitch sessions in
nonprofits and other community late 2019, an organization from
and economic development orga- Minnesota called PCs for People,
nizations. The Kansas City Fed a nonprofit that refurbishes and
piloted the Investment Connection delivers computer equipment
program in 2011. Since then, five to people who could not other-
other Reserve Banks, including wise afford it, pitched its ideas
the Richmond Fed, have launched Investment Connection to potential funders. Through Investment Connection,
programs. Investment Connection in the Fifth District PCs for People was able to make several contacts to
began in 2019 and currently operates in Maryland, North obtain funding. Last year, it expanded into Maryland and
Carolina, Virginia, Washington, D.C., and West Virginia; has since provided more than 900 computers and other
later this year, the program will expand into South Carolina. equipment to low-income students and their families in
The first step for organizations to become involved in Baltimore City.
Investment Connection is to submit a proposal, which must Similarly, during a Virginia pitch session in November
fall into at least one of the following categories: affordable 2020, the Blue Ridge Habitat for Humanity in Winchester,
housing, economic and workforce development, finan- Va., presented a proposal to construct new affordable hous-
cial access and empowerment, small business and small ing in Norris Village, a cottage community. They received
farm technical assistance and development, community $500,000 to build five 1,200-square-foot single-family
facilities and services, or neighborhood revitalization and homes for low- to moderate-income families. Construction
stabilization. of these homes is expected to begin in 2021, and they will
From there, the Investment Connection team and the be purchased by approved Habitat families when they are
Richmond Fed’s Supervision, Regulation and Credit (SRC) finished.
bank examination staff review applications to determine Despite the delays and obstacles caused by the COVID-
whether the proposals are compliant with the Community 19 pandemic, the Richmond Fed is optimistic about the
Reinvestment Act (CRA). The CRA requires financial insti- program’s future. “The future of Investment Connection
tutions to show that they are providing credit to low- and will be to complement and build on an existing funding
moderate-income communities, so banks have an interest in ecosystem and to identify projects more in rural areas,”
adding positively to their CRA records. The SRC staff ulti- says Dolkart. “I think we are going to become a valued tool
mately reviews the proposals to eliminate some degree of in terms of identifying where there is a need in rural areas
uncertainty for funders, an unusual setup. “The SRC staff and an asset to existing successful startup programs to
are looking at proposed projects before the banks have seen enhance what they are doing.” EF
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econ focus • first quarter • 2021 3
BY TIM SABLIK
Has the Pandemic
Changed Cities
Forever?
COVID-19 transformed how we work and socialize,
which could put the future of cities on a new path
T
hroughout American 14th century, to typhoid and cholera Many cities attempted to limit the
history, people have outbreaks in the cities of the Industrial spread of the virus by shifting work
moved from farms Revolution, for most of history, city from offices to homes and limiting
and small towns to dwellers could be expected to live social gatherings. With vaccines rolling
seek their fortunes in shorter lives than their counterparts in out and virus cases falling, the end of
the big city. The story the country. the pandemic seems to be in sight. But
of the last century “There are demons that come with will city life return to the way it was
has been one of increasing urbanization. density, the most terrible of which before?
As of 2018, 86 percent of Americans is contagious disease,” says Edward
lived in cities or surrounding suburbs, Glaeser of Harvard University. As one THE ATTRACTION OF CITIES
and large cities accounted for a simi- of the country’s foremost urban econo-
lar share of total U.S. economic output. mists, Glaeser has long been a cham- To predict cities’ future, it helps
It wouldn’t be a stretch to call cities the pion of cities and their many societal to consider why people have been
engines of growth in the modern era. benefits. But in his forthcoming book attracted to cities in the past.
But despite the appeal and benefits with fellow Harvard economist David “There’s a long-running debate:
of urbanization, cities are not without Cutler, Survival of the City, he devotes Are people in cities because they love
costs. They are more expensive, more his attention to the challenges facing cities or because that is where the
crowded, more prone to crime, and cities, with disease high among them. highest-wage jobs are?” says David
more vulnerable to disease outbreaks Urban plagues in the industrial era Autor of the Massachusetts Institute
than sparsely populated rural areas. eventually led to advances in medi- of Technology. “I think it is more the
The past year has brought that last cine and sanitation technology, which latter.”
cost into stark relief. In the era of enabled cities to thrive and grow Decades of research by urban econ-
modern medicine, it has been easy rapidly. Some researchers now wonder omists point to the productive advan-
to forget that cities have been asso- whether the COVID-19 pandemic tages of cities throughout history.
ciated with many horrible pandem- could put a dent in that growth. Firms in the same industry tend to
ics throughout history. From the Densely populated cities like New York cluster together in cities because they
plague of ancient Athens during the were early hot spots for the virus and can share the same inputs into produc-
Peloponnesian War, to the Black Death suffered high rates of infection and tion, like capital and skilled labor.
that ravaged the cities of Europe in the death. Cities also tend to be located on major
Share this article: http://bit.ly/pandemic-cities
4 econ focus • first quarter • 2021
transportation hubs, giving them
access to bigger marketplaces. People Not All Jobs Can be Done from Home
moving to cities have more options for Survey respondents describe their ability to telework
work and play. They interact with more 40
people, share ideas, and spread knowl-
edge across companies, enabling indus- 35
trywide gains in productivity. 30
PERCENT OF RESPONDENTS
These forces have benefited different
industries at different points in time. 25
In the 19th and early 20th century,
20
many cities grew as manufacturing
hubs for a particular product, such as 15
automobiles in Detroit. Since the late
10
20th century, successful cities have
focused on knowledge-based indus- 5
tries, like finance in New York or
0
computer technology in Silicon Valley. I cannot do my Barely, less than Partly, 50% to Mostly, 80% to Completely,
In recent research, Autor found that job at home 50% efficient 70% efficient 90% efficient 100%+ efficient
work in cities has become increasingly
NOTE: Data from a survey of 2,500 U.S. residents aged 20 to 64, earning more than $20,000 per year in 2019 carried out
polarized since 1980. College-educated between May 21-25, 2020.
professionals earn a wage premium SOURCE: Nicholas Bloom, “How Working from Home Works Out,” SIEPR Policy Brief, June 2020.
working in cities even after accounting
for higher cost of living, but wages for
less-educated urban service workers that generated the impression that have benefited the most from cities in
have flattened. people working from home were lower recent decades are the ones that can
College-educated workers have level and less productive. It’s only since most easily be done remotely, while the
also been attracted to cities in recent about 2010 that we have been able to low-wage service sector jobs that have
decades because of their amenities, fully replicate the office at home.” seen their wages stagnate can only be
such as theaters, exclusive restau- Bloom first began researching remote done in person. The authors argued this
rants, museums, concert venues, and work more than a decade ago. Prior to has revealed a paradox about cities.
professional sporting events. In a 2020 COVID-19, the share of work done at “The large cities in the U.S. are
Journal of Urban Economics article, home was doubling about every 10 years the most expensive places to live.
Victor Couture of the University of but from a very small starting point. Paradoxically, this cost is dispropor-
British Columbia and Jessie Handbury The pandemic greatly accelerated that tionately paid by workers who could
of the University of Pennsylvania found process, essentially forcing any firms work remotely, and live anywhere,”
that these urban amenities were the that could go remote to do so. they wrote.
biggest factor in explaining the influx “We know from the Bureau of Labor The pandemic also diminished the
of young college graduates to cities Statistic’s American Time Use Survey other major attraction of living in cities:
since 2000. that before the pandemic, 5 percent of the amenities. Bars and restaurants
All of this evidence points to cities working days were done from home,” curtailed in-person seating to comply
being attractive places for the highly says Bloom. “During the pandemic, with social distancing guidelines.
educated to live, work, and play prior to the share of working days from home Theaters and museums closed. Sporting
2020. But the response to COVID-19 jumped to over 50 percent.” events played out for TV audiences
may have changed that. Before the But this tenfold increase didn’t and empty stadiums. As the lockdowns
pandemic, most knowledge-based work- affect all workers evenly. In a survey stretched on, some began to wonder
ers in cities still commuted to down- of 2,500 workers Bloom conducted last whether people who could now work
town offices every day. Only a small May, about a third said they could do from anywhere would choose to stay.
share of full-time employees worked their jobs perfectly from home, while
from home. This may have been due to another 30 percent said they couldn’t A BLIP OR A SEA CHANGE?
a stigma against home workers stem- do their job from home at all. (See
ming from limitations on the kind of chart.) After a year of working from home
work that it was historically possible to This divide is starkest in cities. and social distancing, the data suggest
do outside of the office. Lukas Althoff and Conor Walsh of that some city residents did decide
“If you go back to the 1980s, there Princeton University, Fabian Eckert of to move. Bloom found evidence of a
were no networked home comput- the University of California, San Diego, “donut effect” in real estate markets for
ers,” says Nicholas Bloom of Stanford and Sharat Ganapati of Georgetown the most densely populated U.S. metro
University. “So it was mostly low-level University explored the divide in a areas. Rents in city centers declined
jobs that could be done by mail or phone paper last year. They found that the over the course of 2020, while home
that could be done from home. I think high-skill, knowledge-based jobs that prices in the surrounding suburbs rose.
econ focus • first quarter • 2021 5
during the height of the pandemic. Not
Many Workers Want to Continue Working from Home all jobs can be done from home, and
Responses to the question, “In 2021+ (after COVID), how often would you like to have paid even those who have been working
work days at home?” from home full time have expressed
a desire to return to the office at least
30 part time. In a 2015 Quarterly Journal
of Economics article, Bloom and co-au-
25 thors studied a telework experiment at
a Chinese travel agency. Home work-
PERCENT OF RESPONDENTS
20 ers were more productive than their
office colleagues on average, but more
15 than half of the employees selected to
work from home chose to return to the
10 office after the experiment ended. They
missed interacting with their co-work-
5 ers in person.
“For many people, working from
0 their small apartment does not sound
5 days 4 days 3 days 2 days 1 day Rarely Never like a great thing,” says Glaeser.
per week per week per week per week per week “Particularly for young people, face-to-
face contact is likely to continue to be
NOTE: Data from a survey of 2,500 U.S. residents aged 20 to 64, earning more than $20,000 per year in 2019 carried out
part of work, both because of produc-
between May 21-25, 2020.
SOURCE: Nicholas Bloom, “How Working from Home Works Out,” SIEPR Policy Brief, June 2020. tivity and because of pleasure. But that
doesn’t mean that teleworking won’t
transform the world in different ways.”
“Workers aren’t completely leav- it to collaborate with co-authors for Even firms that want their teams to
ing San Francisco or New York, but years. “It’s that it got everyone else to continue meeting in person may decide
they are moving out from the center of use Zoom. Before, it wasn’t acceptable they don’t need to locate in expen-
cities to the suburbs,” says Bloom. “And for me to tell my colleagues, ‘You go to sive cities. With the option to collabo-
that’s entirely rational if you think Hong Kong, and I’ll just be at home on rate with anyone virtually as needed,
post-pandemic you will only come into my computer talking to you.’” they could choose cheaper locations for
the office three days a week. You are In research with Jose Maria Barrero their physical headquarters, perhaps in
less sensitive to a long commute, and of Instituto Tecnológico Autónomo scenic natural settings or with school
you appreciate having more space at de México and Steven Davis of the systems that workers perceive as
home if you will be spending more University of Chicago, Bloom surveyed higher performing.
time there.” nearly 30,000 Americans about their “Because of this, I think cities like
In numerous surveys conducted plans to work from home post-pandemic. New York are more vulnerable than
since the pandemic began, a major- They estimated that 20 percent of all full they have been in decades,” says
ity of workers have expressed a desire working days will continue to be done Glaeser.
to continue working from home, at from home post-pandemic, compared In addition to the impact of
least some of the time, even after the with 5 percent pre-pandemic. They attri- increased telework, social scarring
pandemic ends. (See chart.) Several bute this to several factors. Widespread from the pandemic could have a long-
companies, including Microsoft and adoption of remote work during the term negative effect on demand for
Salesforce, have announced that their pandemic has helped reduce the stigma urban amenities. After living with
employees can continue working from against it, and many firms and workers the virus for over a year, some city
home indefinitely. have reported an experience with remote dwellers might be hesitant to return
The pandemic has solved what Autor work that was better than expected. to crowded restaurants, subway cars,
calls a “coordination problem” — it led Both workers and firms also made and stadiums. Some who formed new
large numbers of people to make the investments in physical and human capi- habits during the pandemic — exercis-
move to videoconferencing technol- tal to support working from home, such ing at home, watching movies on their
ogy all at once. Before the pandemic, as purchasing home office equipment and televisions — might find no reason to
in-person meetings were the norm upgrading remote servers, that they will return to old practices such as going to
for many organizations, despite the be reluctant to completely abandon after the gym or the movie theater.
challenges of travel and coordinating the pandemic ends. On the other hand, the pandemic
schedules. Now, lots of people have “The pandemic has basically accel- has also highlighted the inadequacy
experienced virtual meetings. erated 25 years’ worth of telework of virtual gatherings as a substitute
“The big revolution wasn’t that growth into one year,” says Bloom. for in-person social interaction. After
the pandemic taught me how to use Still, the share of work from home the virus is controlled, there could
Zoom,” says Autor, who has been using is likely to be less than what it was be pent-up demand to return to life
6 econ focus • first quarter • 2021
as normal. In a 2020 paper, Richard COVID-19 pandemic will prompt more similarly lasting scars on some cities?
Florida of the University of Toronto, lasting changes in cities since it has Urban economists also worry that
Andrés Rodríguez-Pose of the London been more widespread, long-lasting, COVID-19 will exacerbate the chal-
School of Economics, and Michael and severe than SARS. Most notably, a lenges cities were already facing before
Storper of the University of California, permanent shift to more remote work the pandemic. Autor’s research
Los Angeles predicted that demand could have both positive and negative highlights a growing divide between
for urban amenities will remain strong effects on urban real estate. On the the fortunes of college-educated
after the virus-induced lockdowns are positive side, reduced demand for city knowledge workers in cities and
lifted. living by some residents and conver- less-educated service workers. Any
“Nonetheless,” the authors wrote, sion of vacated downtown office space increase in telework is only likely to
“even if cities will not shrink or die to residential use could make expensive exacerbate that divide.
from the COVID pandemic, they will cities more affordable. “If you were going to design a dread
certainly change.” This rosy scenario requires that city disease that was somehow going to
infrastructure is able to adjust easily have the effect of making the affluent
THE EVER-EVOLVING CITY to changes in demand, however. While better off and making the less afflu-
history points to the resiliency and ent worse off, you might come up
The history of cities points to both adaptability of cities, it is also full of with something like COVID-19,” says
their resiliency and mutability. Cities cautionary tales of cities that have fallen Autor. “My main concern is that the
have survived countless plagues, natu- into long periods of decline after fail- burdens of this pandemic are falling on
ral disasters, and wars. At one extreme, ing to adjust to big changes. For exam- the people who can least readily bear
Hiroshima and Nagasaki were ple, Detroit has struggled with declining them, and the benefits are accruing to
destroyed by atomic bombs in World population and excess abandoned real the people who least need them.”
War II but eventually returned to their estate for decades after the auto indus- Glaeser is optimistic that service
previous growth paths. Because of this try that fueled the city’s growth shrank. sector jobs can bounce back in cities as
history, most urban economists don’t In a 2020 article in the American long as downtown properties repop-
count cities out in the long run. Economic Journal: Economic Policy, ulate with businesses and residents.
One instructive example from the Raymond Owens III and Pierre-Daniel But if office buildings remain vacant,
recent past is the severe acute respi- Sarte of the Richmond Fed and Esteban either because people and firms move
ratory syndrome (SARS) epidemic Rossi-Hansberg of Princeton University on to other places or because a new
of 2003. Like SARS-CoV-2, the virus found that once neighborhoods empty pandemic emerges to keep people away
behind the illness COVID-19, SARS out, they can remain vacant in the from cities, then the future looks much
was a deadly respiratory virus that absence of coordination between devel- worse for urban service sector workers.
spread quickly. Although it did not opers and residents to rebuild. No one “There’s a fundamental human desire
have the global reach of COVID-19, in wants to be the first to move back to an to be around other human beings,” says
Asian cities that experienced a SARS abandoned neighborhood for fear that Glaeser. “Cities specialize in deliver-
outbreak, it prompted similar responses no one else will follow. ing that, which is why I trust the future
of social distancing and wearing masks. A 2020 paper in the American of cities. But if we have another two or
Yet SARS did not seem to leave much Economic Review by Attila Ambrus three years of lockdowns and then we
of a long-term imprint on cities that and Erica Field of Duke University get a new pandemic within the decade,
experienced it. In Hong Kong, a bad and Robert Gonzalez of the University that’s a really bleak world, not only for
outbreak of SARS prompted more regu- of South Carolina found that hous- urban America but for the entire urban
lar cleaning of touch points in public ing values in neighborhoods badly service sector. For those workers, the
spaces like door handles and elevator hit by pandemics can take centu- ability to provide a service with a smile
buttons. But according to one study, ries to recover. In London, neighbor- provided a safe haven from job loss in an
face masks, which were a common hoods that experienced bad cholera era of automation and outsourcing. But
sight in the city during the outbreak, outbreaks in the mid-1800s continued if the smile turns into a source of peril
gradually disappeared as time passed. to suffer depressed housing values even rather than a source of pleasure, those
It is certainly possible that the 160 years later. Could COVID-19 leave jobs can vanish in a heartbeat.” EF
READINGS
Autor, David. “The Faltering Escalator of Urban Opportunity.” Glaeser, Edward L. “Urbanization and its Discontents.” National
Massachusetts Institute of Technology Work of the Future Bureau of Economic Research Working Paper No. 26839,
Research Brief RB03-2020, Aug. 3, 2020. March 2020.
Bloom, Nicholas. “How Working From Home Works Out.” Ramani, Arjun, and Nicholas Bloom. “The Donut Effect: How
Stanford Institute for Economic Policy Research Policy Brief, COVID-19 Shapes Real Estate.” Stanford Institute for Economic
June 2020. Policy Research Policy Brief, January 2021.
econ focus • first quarter • 2021 7
FEDERAL RESERVE
by tim sablik
The Fed’s New Framework
With a revised strategy, the Fed responds to challenges facing central banks today
M
ost people know that the Fed
makes periodic changes to mone-
tary policy by changing interest
rates. What is perhaps less well known
is that since 2012 the Fed’s approach to
monetary policy has been guided by a
public strategy document that defines the
Fed’s longer-run goals. The Fed has made
minor updates to this framework over the
years, but in August 2020, it unveiled a
major revision of its policy strategy.
The original 2012 statement on
longer-run goals outlined how the
Federal Open Market Committee
(FOMC), the Fed’s policymaking body,
would seek to achieve its dual mandate
from Congress of maintaining maxi-
mum employment and stable prices.
The FOMC announced as its goal an
inflation rate of 2 percent, measured
by the personal consumption expen- Fed Chair Jerome Powell delivers opening remarks at a Fed Listens event in Chicago on June 4, 2019.
ditures (PCE) price index. It declined
to set a specific target for maximum the Fed’s policy framework stretches would eliminate any potential confu-
employment, noting that the maxi- back further than that, reflect- sion in the markets, ensuring smoother
mum level of employment the economy ing changes in the challenges facing implementation of policy changes.
can sustain changes over time and is central banks over the decades. Additionally, research suggested that
largely driven by nonmonetary factors. announcing a long-term goal for infla-
The Fed’s new framework sets a goal CHOOSING A TARGET tion would help anchor the public’s
for inflation that averages 2 percent expectations for inflation, making it
over time, meaning that the FOMC When Congress established the Fed’s easier to maintain stable prices over
will now allow periods of higher infla- dual mandate in 1977, the FOMC was the long run.
tion to make up for periods of infla- much less vocal about how it conducted By the 1990s, central banks in
tion below target. On employment, monetary policy to achieve those goals. several developed countries such as
the Fed’s framework now emphasizes “The FOMC didn’t announce its deci- New Zealand, Canada, and the United
that full employment is a “broad-based sions when they were made; they let the Kingdom adopted inflation targets.
and inclusive goal.” Additionally, the markets try to figure them out based on The Fed waited until 2012 to formally
co u rt esy o f t h e f e d eral r e s e rv e b oa r d o f gov er n o rs .
FOMC pledges to respond specifically the Fed’s actions,” says Andrew Levin, announce an inflation goal, but by
to shortfalls from maximum employ- a professor of economics at Dartmouth then U.S. monetary policymakers were
ment rather than “deviations” as in the University who served as an econo- convinced of the benefits of commu-
2012 statement, which implied that too mist at the Fed Board of Governors for nicating more openly with the public.
much employment could be as prob- two decades. “That was standard prac- These communication strategies grew
lematic as too little. tice among most central banks until the out of the experiences of high inflation
These revisions, which the FOMC 1980s and 1990s.” in the 1970s. But what central banks
reaffirmed this January, were the By that time, economists and policy- did not anticipate was that starting in
culmination of a year-and-a-half long makers had come to view central bank the late 2000s, they would actually face
public review of monetary policy secrecy as counterproductive. Publicly the opposite problem: inflation that
conducted by the Fed. But the story of announcing monetary policy decisions was too low rather than too high.
Share this article: http://bit.ly/fed-framework
8 econ focus • first quarter • 2021Hints of this challenge first emerged
in Japan. After booming in the 1980s, Aiming at a Target
the country suffered a serious recession Inflation since the introduction of the Fed’s 2 percent goal
in the early 1990s. Afterward, economic 4.0
growth slowed and the Bank of Japan
cut interest rates to effectively zero, 3.5
PERCENT CHANGE FROM YEAR AGO
where they have largely stayed since. 3.0
“Economists first thought this was
just an issue for Japan,” says Levin. 2.5
“But then in the early 2000s, the 2.0
United States had a recession where
interest rates got very low. And econ- 1.5
omists started thinking very seriously 1.0
about how it’s not easy for central
banks to reduce nominal interest rates 0.5
below zero.” 0.0
The Great Recession of 2007-2009
2012 2013 2014 2015 2016 2017 2018 2019 2020 2021
saw nominal rates fall to zero in several
developed economies. In the United NOTE: Based on Personal Consumption Expenditures chain-type price index.
States, the Fed lowered its interest rate SOURCE: U.S. Bureau of Economic Analysis
target to effectively zero in late 2008
and didn’t raise rates until the end of
2015. The Fed had only raised inter- Woodford of Columbia University 2012, the median estimate of the neutral
est rates back up to 2.5 percent at the observed that “the definition of a policy fed funds rate among FOMC members
end of 2018 before it started cutting prescription in terms of an inflation was 4.25 percent — 2 percent inflation
them again. The COVID-19 pandemic target presumes that there is in fact plus a natural rate of 2.25 percent. Since
prompted policymakers to drop rates some level of the nominal interest rate then, it has fallen to 2.5 percent.
back to zero. that can allow the target to be hit (or “With interest rates generally
Many economists have attributed at least projected to be hit, on average). running closer to their effective lower
the increased prevalence of near- But, some argue, if the zero interest bound even in good times, the Fed
zero policy rates to a global decline in rate bound is reached under circum- has less scope to support the econ-
the natural rate of interest — the rate stances of deflation, it will not be possi- omy during an economic downturn
at which monetary policy is neither ble to hit any higher inflation target, by simply cutting the federal funds
expansionary nor contractionary. (See because further interest rate decreases rate,” Fed Chair Jerome Powell said
“The Fault in R-Star,” Econ Focus, are not possible.” in a speech announcing the Fed’s new
Fourth Quarter 2018.) A lower natural If a central bank consistently fails to policy framework on Aug. 27, 2020.
rate means the peak interest rate will meet its inflation target while interest “The result can be worse economic
be lower during economic expansions. rates remain at zero, the public might outcomes in terms of both employment
When interest rates are near zero, start to question the credibility of that and price stability, with the costs of
policymakers can’t lower rates much target. Indeed, observers both inside such outcomes likely falling hardest on
further because individuals would just and outside of the Fed have voiced this those least able to bear them.”
choose to hold cash instead of negative concern since the FOMC announced A lower neutral rate means that the
interest-bearing bonds. (See “Subzero its long-run inflation goal of 2 percent. Fed is more likely to face the constraint
Interest,” Econ Focus, First Quarter Except for a few brief periods, inflation of the zero lower bound during a
2016.) This can constrain conventional has persistently run slightly below the downturn. In the years leading up to
monetary accommodation, resulting Fed’s target since 2012. (See chart.) the 2020 framework revision, Fed offi-
in monetary policy that is tighter than cials began to explore different solu-
central bankers would prefer and slow- A DIFFERENT APPROACH tions to this problem.
ing economic recovery. “Broadly speaking, one can point
This also poses a problem for the The apparent decline in the natural rate to two approaches: raising the infla-
inflation-targeting strategies that many of interest was one of the motivations tion target without changing the policy
central banks adopted. In a frequently for the Fed to undertake a review of its rule or changing the policy rule with-
cited 2003 paper, Gauti Eggertsson monetary policy framework. When the out changing the target,” says Jordi
of Brown University and Michael Fed first unveiled its inflation goal in Galí of the Center for Research in
econ focus • first quarter • 2021 9FE DE R AL R E S E RVE
International Economics, Universitat described it in 1958 — the result of “An outright decoupling of infla-
Pompeu Fabra, and the Barcelona what he called a “quick and dirty” tion from indicators of economic slack
Graduate School of Economics. analysis over a weekend — the Phillips would call into question the infla-
Galí acknowledges that the first curve has served as one guidepost for tion targeting framework widely
approach may seem counterintuitive monetary policymakers. It posits a link adopted by central banks over the past
when the Fed has consistently fallen between employment and inflation. decades, since that framework hinges
short of its 2 percent inflation target. When employment is running above critically on the existence of a posi-
How could it be expected to achieve the economy’s long-run potential, infla- tive relation between inflation and the
an even higher target? In his research, tion should rise, as a tight labor market level of economic activity,” Gambetti
Galí argues the Fed could opportunis- puts upward pressure on wages and and Galí wrote.
tically announce a higher target once prices. Conversely, when there is a lot A flatter Phillips curve would mean
inflation surpasses 2 percent and then of slack in the labor market, inflation a weaker signal for when the Fed
hold steady at the new target. In a pressures should be more muted. should begin raising rates to prevent
world with a low natural rate of inter- There are problems with using the an overshoot of inflation. But Fed offi-
est, an inflation target of 4 percent, for Phillips curve as a guide for policy cials also saw an opportunity in this
example, would provide monetary poli- in practice, however. It is difficult to development. Low unemployment
cymakers with more room to cut rates know the labor market’s full poten- levels weren’t placing much upward
during downturns before hitting the tial, and that value changes over time. pressure on prices, but the tight labor
zero lower bound. This benefit would In the late 1990s, for example, unem- market was proving beneficial for
need to be weighed against the costs of ployment fell to historically low levels, workers. As part of the review of its
higher inflation, however. but inflation remained low despite the monetary policy framework, the Fed
Ultimately, the Fed chose to keep its Fed holding steady on rates. Evidently, held a series of “Fed Listens” events in
2 percent inflation target but adopt a the natural rate of unemployment in 2019. In these sessions, the Fed invited
new strategy: flexible average inflation the economy had fallen since the prior members of the public to share their
targeting. Under this approach, the Fed expansion. Conversely, the 1970s saw economic experiences. One consistent
would allow inflation moderately above both unemployment and inflation rise takeaway was that minorities, includ-
2 percent following periods where at the same time — a phenomenon ing blacks and Hispanics who histor-
inflation is below 2 percent. In theory, dubbed “stagflation.” ically have suffered higher unemploy-
this should help boost inflation expec- After a slow recovery from the Great ment rates than whites, were finding
tations for the future and give the Fed Recession, unemployment in 2019 fell more opportunities for employment
more room to be accommodative. to levels not seen in 50 years. This was and advancement as the recovery
Under the Fed’s old 2012 framework, beyond most estimates of the econo- gained momentum. This prompted a
as the economy strengthened, the Fed my’s full potential, and many observ- renewed discussion among economists
responded by raising its policy rates. ers expected inflation to start rising and policymakers about the potential
This was consistent with economic as well. But wage and price inflation benefits of running an economy “hot”
theory: In a world with stable inflation remained muted. Labor force partici- — that is, allowing employment to rise
and inflation expectations, the natu- pation among prime-age workers (ages beyond current estimates of its long-
ral rate of interest and thus the nomi- 25-54) increased as more people reen- run sustainable level.
nal interest rate should move with tered the workforce, defying earlier San Francisco Fed President Mary
the economy. So, as economic activity predictions of a long-term decline Daly, along with several current and
heated up and unemployment reached due to the baby boomers aging into former Fed co-authors, explored this
historic lows in 2017-2019, the Fed retirement. Economists and poli- idea in a 2019 paper. They found
gradually raised rates. But inflation still cymakers increasingly speculated evidence that minorities, including
remained below target. This puzzle that the Phillips curve relationship black and Hispanic workers, expe-
prompted the other major revision to between employment and inflation had rienced greater employment losses
the Fed’s policy framework regarding flattened. during downturns than whites. These
its full employment mandate. In a recent paper with Luca groups also benefited more from
Gambetti of Universitat Autònoma de employment gains when the labor
THE PHILLIPS CURVE FALLS FLAT Barcelona, Galí presented evidence of market was already strong. Essentially,
what he called “a growing disconnect less advantaged groups were typically
At the center of the change are evolv- between wage inflation and unemploy- the first to suffer during recessions and
ing views about the Phillips curve. In ment.” Like the falling natural rate the last to recover during economic
the decades since New Zealand-born of interest, this presented a potential expansions. In light of the low inflation
economist Alban William Phillips problem for inflation targeting. of recent years, some Fed policymakers
10 econ focus • first quarter • 2021have argued that the central bank can LOOKING TO THE NEXT RECOVERY According to their latest projections,
exercise more patience before tighten- most Fed officials don’t expect this to
ing, allowing more time for the labor What does the Fed’s new framework happen until 2023 or later. But the Fed’s
market to strengthen and benefit less mean for monetary policy during the new framework is a step into uncharted
advantaged groups. post-COVID-19 recovery? For now, territory, from economic theory to the
“For nearly four decades, monetary the FOMC has said the prescription real world of policy.
policy was guided by a strong presump- is clear: continued accommodation. “Some policies work very well in
tion that accommodation should be Unemployment is still above pre-pan- our computer simulations but may be
reduced preemptively when the unem- demic levels; inflation, while it has harder to implement in practice since
ployment rate nears its normal rate increased, remains below 2 percent. they require the central bank to steer
in anticipation that high inflation But how will the Fed respond under inflation along a desired path with a
would otherwise soon follow,” Fed the new framework when its objectives degree of precision that may not be
Governor Lael Brainard said in a recent conflict? available to policymakers,” says Galí.
lecture to a Harvard College “This certainly poses a risk to
Principles of Economics class. their credibility, but so does
This view was perhaps “We believe that conducting a review at regular doing nothing.”
most famously expressed by intervals is a good institutional practice.” One thing is certain: This
former Fed Chair William latest revision to the Fed’s
McChesney Martin Jr. in 1955 monetary policy framework
when he described the Fed as a “chap- “Inevitably, there are going to be won’t be the last. In its new state-
erone who has ordered the punch bowl times when inflation is picking up, but ment on longer-run goals, the Fed also
removed just when the party was really employment is still below target,” says committed to undertaking a public
warming up.” While the Fed’s new Levin. Under the 2012 framework, the review of its monetary policy strategy,
policy framework does not prescribe FOMC pledged to take a “balanced tools, and communication practices
a particular response to achieving the approach” when considering trade-offs every five years.
central bank’s goals, the FOMC has between full employment and price “We believe that conducting a review
signaled a greater willingness to keep stability. Levin notes the 2020 revi- at regular intervals is a good institu-
rates low as long as inflation is below sion removes that language, leaving tional practice, providing valuable feed-
target. some questions about how the FOMC back and enhancing transparency and
“Our new monetary policy framework will respond to conflicts between its accountability,” Chair Powell said in
recognizes that removing accommoda- objectives. his speech unveiling the new frame-
tion preemptively as headline unemploy- Chair Powell and other members of work. “And with the ever-changing
ment reaches low levels in anticipation of the FOMC have so far stressed that as economy, future reviews will allow us
inflationary pressures that may not mate- long as unemployment remains elevated, to take a step back, reflect on what we
rialize may result in an unwarranted loss the Fed will not move to tighten have learned, and adapt our practices as
of opportunity for many Americans,” policy unless inflation is consistently we strive to achieve our dual-mandate
Brainard said in her presentation. above target for an extended period. goals.” EF
READINGS
Aaronson, Stephanie R., Mary C. Daly, William L. Wascher, and Galí, Jordi, and Luca Gambetti. “Has the U.S. Wage Phillips Curve
David W. Wilcox. “Okun Revisited: Who Benefits Most From a Flattened? A Semi-Structural Exploration.” Central Banking,
Strong Economy?” Brookings Papers on Economic Activity, Spring Analysis, and Economic Policies Book Series, in Castex, Gonzalo,
2019, pp. 333-404. Jordi Galí, and Diego Saravia (ed.), Changing Inflation Dynamics,
Eggertsson, Gauti B., and Michael Woodford. “The Zero Bound Evolving Monetary Policy, 2020, vol. 27, pp. 149-172.
on Interest Rates and Optimal Monetary Policy.” Brookings Papers Levin, Andrew T. “The Design and Communication of Systematic
on Economic Activity, 2003, no. 1, pp. 139-233. Monetary Policy Strategies.” Journal of Economic Dynamics &
Control, 2014, vol. 49, pp. 52-69.
econ focus • first quarter • 2021 11TURNING
STORMWATER
GREEN
Green infrastructure can help reduce polluting runoff during severe
storms, but questions about costs give some localities pause
BY HAILEY PHELPS
O
n Aug. 25, 2017, Hurricane that weather events will continue to groundwater reservoirs.
Harvey hit the coast of become more severe due to changes Most urban stormwater and sewer
Texas. Over the next four in the Earth’s climate — has contrib- systems in the United States were built
days, the storm dumped uted to concerns about pollution from following World War II, and cities
about one trillion gallons of rainwa- stormwater runoff. When it rains in have historically set aside little money
ter onto Houston. At its peak on Sept. 1, urban areas, stormwater flows across for infrastructure operations, main-
2017, one-third of Houston was under- the streets and sidewalks at faster tenance, and renewal. The threat of
water. The total cost of the destruction speeds and picks up harmful pollut- increased flood events has brought
was $125 billion, which included damage ants, carrying a greater amount of together local government officials,
to over 300,000 structures (more than them into storm drains and rivers. policymakers, climate scientists, and
200,000 homes) and one million vehicles. The increased runoff also limits civil engineers to consider solutions
Nearly any city would be overwhelmed the amount of precipitation that beyond traditional flood control infra-
by more than 4 feet of rain, but Houston can soak into the soil and replenish structure to increase resiliency.
is unique in its regular massive floods. Its
sewer system was designed to only clear
out 12 to 13 inches of rain per 24-hour
period, so it quickly overflows and floods
during large storms. Another issue is
urban sprawl and urbanization, which
limits the city’s natural drainage capac-
ity and makes cities like Houston more
susceptible to flooding.
More than half of the world’s
population lives in cities. Before the
pandemic, experts predicted that this
share was likely to grow to two-thirds
i m age : w i l l pa rs o n / c h e sa pe a k e bay p ro g ram
by 2050. While the trajectory of cities
might be on a different course today
(see “Has the Pandemic Changed Cities
Forever?” p. 4), urbanization remains
at a high level by historical standards.
Urbanization typically means expanded
areas of hard, impermeable surfaces
such as roofs, sidewalks, and streets. A rain garden at Long Wharf Park captures and filters stormwater pollution before it reaches the Choptank River
This — together with predictions in Dorchester County, Md.
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12 econ focus • first quarter • 2021You can also read
